Successful succession: Where to start when exiting the family business

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You’ve built your family business and worked hard for years to establish a loyal set of clients and customers. Now it’s time to step away.

Instead of selling or closing the business you’ve put your heart and soul into, you want to pass the torch to someone else. The handover may be to a family member, or an experienced and dedicated employee. Regardless of who assumes control, experts say entrepreneurs need a solid succession plan that ensures a smooth transition and helps the business to prosper long after you’ve given up the corner office.

“Succession is a life event. It only happens once, so it’s important to get it right,” says Kevin Au, a professor at the Center for Family Business at Chinese University of Hong Kong. “It’s very difficult, even for very smart people.”

Succession is a decision more family business owners will need to make in the coming years, as first-generation entrepreneurs near retirement. A recent Deloitte survey says almost half (46 per cent) of the business families it surveyed in Asia indicated they are in the midst of the developmental stage of their management succession process. Two thirds (67 per cent) expect to transfer management of the family business to other family members in the three-to-five years.

The survey shows a high proportion of business families would consider hiring management to lead the business if there are no suitable familial successors. “It would appear that this option is even more acceptable to business families than selecting from their pool of extended family members,” the report shows.

Getting professionals involved

Most surveyed said they needed training and support to help with the succession process, with 82 per cent indicating they’ve found non-family advisors invaluable for developing and mentoring their next generation for key roles in the family business.

“Business families value non-family management who are able to balance the needs of the business and the family, and to effect change management to grow the family business,” the report states.

Experts says family business owners should also consider hiring outside advisors to provide a valuation of the company before it’s passed on, regardless of whether it’s within the family or to an outsider. The process should begin years in advance, to establish a history of what the business was worth during various business cycles and/or when certain products or services were being offered. A valuation also helps to put a price on the business when the owners exit. Some may wish to receive the full value of the business by selling all or a portion of their stake. Advisors are able to help business owners choose the best transfer strategies.

Connect with a skilled advisor

It’s also a good idea to get the succession plan in writing, experts say. This will serve as a roadmap for those running the business after you’ve stepped away – and help to ensure its continued success.

No plan? Know the risks

Succession is both a tricky and risky process. Statistics showing only 30 per cent of family businesses last into the second generation, only 12 per cent make it to the third and three per cent beyond that, according to the Family Business Institute. Family disputes and rivalries tend to drive many family business failures.

“I have never seen any corporate event that is more serious,” Joseph Fan, a professor at the Chinese University of Hong Kong told the Harvard Business Review (HBR).

After studying the market value of family-run companies across Asia, Fan found an average decline of about 60 per cent in the eight years following a change in leadership.

“If these critical transitions are mishandled, it could put many of them at risk, destroying economic value and severely handicapping a region that currently accounts for more than a third of the world’s GDP and an even larger proportion of global growth,” according to the HBR article, written by Claudio Fernández-Aráoz, a senior adviser at the global executive search firm Egon Zehnder, and two of his colleagues.

To avoid disruption and loss of economic value, experts like Au recommend businesses start planning the succession early, since it can be a long process that often involves a number of stakeholders over and above the outgoing and incoming leadership.

“The process and the outcome are equally important,” says Au.

For example, parents may assume their children want to take over the family business, and then find out near retirement they have other plans for their future careers. It’s better to know sooner, Au says. What’s more, Au says a succession plan may need to include a will or trust for family members or friends who may benefit from the proceeds of the business after its founders have stepped away. Succession planning may also require input from various family members who have a stake in the company, as well as any loyal clients and customers.

“It does come down to making decisions about competence and interests, just as you would in any company,” says Ignatius (Iggy) Chong, Managing Director of Greater China at RBC Wealth Management.

For successful succession planning, he recommends businesses establish a set of values for the company, and communicate, regularly.

Determine your values

As a starting point, it’s important to establish the values of the company, says Chong.

“Businesses that survive the longest have a very compelling mission and set of values that are well defined.”

Values can be product or service oriented, or both.

“You can really bring something out that can bind families and bind businesses,” Chong says.

Cultural sensitivities and family history can complicate the succession planning process, but should be taken into consideration. For example, some elders may be reluctant to open up about the family business, or want to control their legacy even when they step away.

Break the silence and communicate

It sounds simple, but to be able to sit down as a family and communicate about succession plans is a lot harder than many people realize at first, Chong says. Some families refuse to talk about succession because it involves the subject of death.

“Talking about death isn’t taboo,” says Chong, especially when it’s about the legacy of a family business. “You have to talk about it. There is no other way.”

Chong says many families hire an adviser to help guide that conversation and keep it as professional as possible.

“A misconception is that it’s a negative thing. In fact, having the discussion can actually be a much more positive thing for uniting the family,” Chong says. “It can help to understand: What is the family about. It’s a fantastic topic to bring to the family table to talk through.”

Chong also encourages family to have the discussion early, when the kids are in their teens and as they develop their career goals.

“Another misconception is that there is plenty of time to have the discussion. You don’t,” says Chong. “The time is now.”

The article is for information only and contents do not constitute recommendation to purchase any investment product. Nothing in this article constitutes legal, accounting or tax advice and you are advised to seek independent legal, tax and accounting advice prior to acting upon anything contained in this article.

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